A meme that has been circulating for some time with Oprah Winfrey – “ESG for everyone” – perfectly reflects what is currently happening in the business world. ESG is now an element of business strategy and communication with stakeholders and, like every new element, requires adjusting to the company’s management and reporting mechanisms. How do you incorporate ESG reporting?
ESG is really nothing new. It is simply a different way of looking at things that happen in companies. The previous financial approach to manage an organization is being converted into metric units, thereby viewing things from a different angle.
For example, in the case of electricity costs that have been monitored until now, the company needs to report its electricity consumption in kilowatt hours. This is the point where the company struggles the most - while the monetary values from invoices are recorded in detail and reported in accounting systems, the amount of electricity that is purchased – if the structure of business units allows – is usually recorded in Excel file on a shared drive by the technical department.
Once the process of defining material aspects is complete and it is clear which ESG areas from the company’s perspective should be monitored and reported on, the first step in structuring the reporting process is to understand how to collect data:
Who is responsible for collecting the data?
How often is the data collected?
Where is it stored?
Who has access to it?
Does it require manual intervention?
Are changes to the data recorded?
Is data independently verified against the source documentation?
Is it formally validated prior to external reporting?
Once we have found the answers to these questions, the next step is to confirm the completeness of the information reported. Completeness can be understood in two ways:
Completeness of units – i.e., does the company include all units, e.g., stores, warehouses, transhipment points, headquarters, etc.
Completeness of information – i.e. does the company include all periods, products, employees, etc., depending on the indicator reported.
The third and final step is to verify the accuracy of the information reported.
Each method of data collection carries a risk which should be minimized by using appropriate control mechanisms.
|Error in manual transfer of data from external documents or from measuring equipment||The division of roles between the person introducing the data and the verifier|
|Error in the operation of measuring equipment||Periodic verification of deviations from the expected trend, validation of measuring equipment by external entities|
|Error in systemic transfer of data between company systems||Checking on a sample of records whether the data transferred from system A is the same as in system B, and on another sample of records whether the data from system B is the same as in system A, checking checksums, number of records, etc.|
|Error in aggregation of data from several sources in an Excel file||Using automatic Excel functions, assigning desired values (e.g. vlookup)|
What happens when the completeness or accuracy cannot be fully maintained? Estimation comes in handy. For an estimate to be reasonable and justifiable when verified by an independent third party, its underlying assumptions must strive for the lowest possible margin of error. The table below shows examples of reasonable estimation:
|Problem||Rational estimation method|
|I do not have data from several units, e.g. stores||The key parameters are the parameters of the missing units – in the case of a store, for example, this could be the floor space. To estimate the missing number you can, for example, calculate the average for stores of similar size and use this value for the missing units.|
I do not have an invoice for one month
I am reporting based on a meter that broke down and showed an unreasonable value at the end of the month
For companies that are not influenced by seasonality, the average for the remaining 11 months can be taken and that value can be used for the missing month.
For companies influenced by seasonality, the recommended way may be to adopt a proportional value compared to the previous reporting period.
The process of integrating key ESG indicators into the company’s internal reporting system depends on the complexity of the ESG strategy, the size of the organization, and its maturity in managing non-financial issues. To better monitor progress in the implementation of the strategy and to be able to react and correct events in real time, companies increasingly decide to replace the annual rush for non-financial data with a structured, periodic process of internal reporting. Dashboards dedicated to various groups of internal stakeholders are helpful, thanks to which periodic changes are immediately visible.
Another element of the approach to ESG management is the introduction of quality, health and safety, energy and other management systems in companies. However, it is worth remembering that any management system is based on policies and procedures, and in the long run, the company's vigilance regarding the quality of information may be dormant. This is where the internal audit function comes to the rescue, with either an auditor specialized in ESG or an external auditor performing an independent assurance service (ISAE3000 standard) for the non-financial information presented.
The main advantage of external verification is that the auditor takes an independent look at the non-financial data reporting processes and assesses the company’s understanding of the reporting standards. By going through the process in detail, along with its reperformance for the audit sample, the auditor verifies whether the risks associated with the process have been mitigated and whether the reported value is complete and adequate. The adequacy of the information is verified against the source documentation and the definition of the indicator of a given standard (e.g. GRI) against which the given value is reported.
Another advantage is the receipt of a report from an independent assurance service, which can be published together with the report. This report increases the credibility of the presented non-financial data, which is particularly important from the perspective of key stakeholder groups, such as investors.
In the current reporting environmental, the quality of non-financial information is unfortunately not at a satisfactory level. There are several legal acts in Polish legislation on reporting ESG issues, but none of them has so far established a formal requirement to report in accordance with recognized international or national standards or to conduct an independent verification of non-financial information.
The growing awareness of the importance of ESG issues, in particular with regard to the business strategy, as well as the growing information demand of key stakeholder groups, will force the improvement of the quality of the information presented in the long term. The long-awaited change in improving the quality of non-financial information will be brought by the draft Corporate Sustainability Reporting Directive (CSRD) adopted by the European Commission, introducing changes to the Non-Financial Reporting Directive (NFRD). This project requires an independent entity to perform a moderate assurance service for non-financial information presented by reporting entities.
The change in the approach to reporting non-financial data will no longer be "icing on the cake" and, in order to constitute a coherent element of the company's overall external reporting, it will have to undergo a thorough transformation, in particular in terms of the quality of the information presented.